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Economic “Necessity” in International Law

Published online by Cambridge University Press:  20 January 2017

Alan O. Sykes
Alan O. Sykes*
Affiliation:
Stanford University
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Exigent circumstances can extinguish or suspend a wide range of legal obligations. They may empower governments to seize property or quarantine individuals. They may excuse the nonperformance of private or public contractual obligations. And, of especial interest here, they may permit governments to deviate from their obligations under treaties or customary international law (CIL).

Type
Editorial Comment
Information
American Journal of International Law , Volume 109 , Issue 2 , April 2015 , pp. 296 - 323
Copyright
Copyright © American Society of International Law 2015

Footnotes

*

I have benefited immensely from the comments of workshop and conference participants at Pepperdine, Northwestern, and Toronto, and at the annual meeting of the American Law and Economics Association, New York, May 2015.

References

1 Treaty Concerning the Reciprocal Encouragement and Protection of Investment, U.S.-Arg., Nov. 14, 1991, 31 ILM 124 (1991).

2 The status of cases against Argentina under World Bank arbitration (International Centre for Settlement of Investment Disputes) may be found at the ICSID website, https://icsid.worldbank.org/apps/ICSIDWEB/cases/Pages/AdvancedSearch.aspx?gE=s&rntly=ST4.

3 The literature addressing the Argentina cases in whole or in part includes Alvarez, José, The Public International Law Regime Governing International Investment, 344 Recueil Des Cours 193, 369–443 (2009)Google Scholar; Alvarez, José & Khamsi, Kathryn,The Argentine Crisis and Foreign Investors:A Glimpse into the Heart of the Investment Regime, [2009] 1 Y.B. Int’l Investment L. & Pol’y 379Google Scholar; Alvarez, José & Topalian, Gustavo, The Paradoxical Argentina Cases, 6 W. Arb. & Mediation Rev. 491 (2012)Google Scholar; Bjorklund, Andrea K.,Emergency Exceptions: State of Necessity and Force Majeure, in Oxford Handbook of International Investment Law 459 (Muchlinski, Peter, Ortino, Federico & Schreuer, Christoph eds., 2008)Google Scholar; Burke-White, William W., The Argentine Financial Crisis: States Liability Under BITs and the Legitimacy of the ICSID System, 3 Asian J. Wto & Int’l Health L. & Pol’y 199 (2008)Google Scholar; Kurtz, Jurgen, Adjudging the Exceptional at International Investment Law: Security, Public Order and Financial Crisis, 59 Int’l & Comp. L. Q. 325 (2010)CrossRefGoogle Scholar; Reinisch, August, Necessity in Investment Arbitration, 2010 Neth. Y.B. Int’l L. 137Google Scholar; Jeswald W. Salacuse, The Law of Investment Treaties 342–48(2012); Sweet, Alec Stone,Investor-State Arbitration: Proportionality’s New Frontier, 4 L. & Ethics Hum. Rts. 47 (2010)Google Scholar; van Akken, Anne, Smart Flexibility Clauses in International Investment Treaties and Sustainable Development: A Functional View, 15 J. World Investment & Trade 827 (2014)CrossRefGoogle Scholar; and Michael Waibel, Sovereign Defaults Before International Courts and Tribunals (2011).

4 A general discussion of “commitment” versus “flexibility” in investment treaties, touching briefly on the necessity cases, can be found in van Akken, Anne, International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis, 12 J. Int’l Econ. L. 507 (2009)CrossRefGoogle Scholar.

5 71 A. 188 (Vt. 1908).

6 124 N.W. 221 (Minn. 1910).

7 Necessity, in The Free Dictionary by Farlex, at http://legal-dictionary.thefreedictionary.com/Necessity+defense.

8 This principle may be limited to cases where physical damage is done;it is doubtful that a boat owner trespassing under circumstances such as those in Ploof could be held liable for the fair rental value of a dock that suffered no actual damage. This result has economic justification, however, if the dock owner suffers no opportunity cost due to the temporary use of the property by another.

9 E.g., Shavell, Steven, Strict Liability Versus Negligence, 9 J. Legal Stud. 1 (1980)CrossRefGoogle Scholar.

10 E.g., Mayor of New York v. Lord, 18 Wend. 126 (N.Y. 1837).

11 To be sure, this rule applies not only to cases of economic exigency but to much more mundane settings, as when the seller of a good receives a better offer from another buyer.

12 The classic article is by Shavell, Steven, Damage Measures for Breach of Contract, 11 Bell J. Econ. 466 (1980)CrossRefGoogle Scholar.

13 The arguments on both sides are found in Schwartz, Alan, The Case for Specific Performance, 89 Yale L.J. 271 (1979)CrossRefGoogle Scholar.

14 Expectation damages may be seen as a liability rule since the breaching party need not secure permission to avoid performance. Specific performance is a “property rule” that forces a party who wishes to breach, to perform the required action anyway. The distinction originates in Calabresi, Guido & Melamed, A. Douglas, Property, Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972)CrossRefGoogle Scholar.

15 To be sure, the cases in which nonperformance results from true impossibility—such as the death of the promisor to a personal services contract—do not involve acts of necessity as defined herein and are not pertinent.

16 American Law Institute, Restatement (First) of Contracts §454 (1932); see also American Law Institute, Restatement (Second) of Contracts §261 (1981).

17 Mineral Park Land Co. v. Howard, 156 P. 458 (Cal. 1916).

18 E.g., Pearce Young Angel Co. v. Charles R. Allen, Inc., 213 S.C. 578, 50 S.E. 2d 698 (1948).

19 Sykes, Alan O., The Doctrine of Commercial Impracticability in a Second-Best World, 19 J. Legal Stud. 43 (1990)CrossRefGoogle Scholar.

20 E.g., Posner, Richard & Rosenfield, Andrew, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Stud. 83 (1977)CrossRefGoogle Scholar.

21 Sykes, supra note 19.

22 General Agreement on Tariffs and Trade 1994, Apr. 15, 1994 [hereinafter GATT], Marrakesh Agreement Establishing the World Trade Organization [hereinafter WTO Agreement], Annex 1A, 1867 UNTS 187; General Agreement on Trade in Services, Apr. 15, 1994, WTO Agreement, supra, Annex 1B, 1869 UNTS 183.

23 See 1 World Trade Organization, GATT Analytical Index 601–03 (1995).

24 Id. at 603.

25 Id. at 604–05.

26 Id. at 603.

27 Id. at 601.

28 Interestingly, some more recent investment treaties provide exceptions for adopting reasonable measures for prudential reasons, such as those to maintain the integrity of the financial system. See Article 10 of the 2004 Canadian model BIT,available at http://www.italaw.com/documents/Canadian2004-FIPA-model-en.pdf. Such exceptions are not self-judging, however, and leave open the question whether the cancellation of a debt would ever be a “reasonable measure.”

29 To give two examples, the WTO has ruled that measures to protect extraterritorial seal populations against animal cruelty fall within the “public morals” exception and that measures to protect clean air come within the “exhaustible natural resources” exception.See Appellate Body Report, European Communities—Measures Prohibiting the Importation and Marketing of Seal Products, WT/DS400/AB/R&WT/DS401/AB/R(adopted June 18, 2014); Appellate Body Report, United States—Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R (adopted May 20, 1996).

30 See, e.g., Appellate Body Report, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161 & WT/DS169/AB/R (adopted Jan. 10, 2001) (necessity test violated); Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (adopted Nov. 6, 1998) (chapeau violated).

31 The proposition that such analysis can be understood as a form of cost-benefit analysis that is attentive to error costs is developed in Sykes, Alan O., The Least Restrictive Means, 70 U. Chi. L. Rev. 403 (2003)CrossRefGoogle Scholar.

32 Supra note 22.

33 Apr. 15, 1994, WTO Agreement, supra note 22, Annex 1A, 1869 UNTS 154.

34 19 U.S.C. §2251 (2012).

35 See Sykes, Alan O., Protectionism as a “Safeguard”: A Positive Analysis of the GATT “Escape Clause” with Normative Speculations, 58 U. Chi. L. Rev. 255 (1991)CrossRefGoogle Scholar; Alan O. Sykes, The Wto Agreement on Safeguards (2006).

36 Bagwell, Kyle & Staiger, Robert W., A Theory of Managed Trade, 80 Am. Econ. Rev. 779 (1990)Google Scholar.

37 Declining industries are commonly observed to invest heavy resources in the pursuit of trade protection. This phenomenon has two possible explanations: (1) they are more likely to succeed in securing protection because they are politically sympathetic suitors due to high unemployment among their workers, and (2) the returns to protection will not be competed away by the entry of new firms as long as investment returns do not rise above the competitive level. Likewise, if competing foreign exporters that would be affected by safeguards measures are growing and profitable, restrictions on their exports may not engender as much political outcry if the exporting firms expect their returns to be diminished anyway by competitive entry. These observations afford a plausible account of why protection for troubled industries against efficient foreign competitors may yield joint political gains to treaty partners on average, even if it reduces economic efficiency in the conventional sense. Sykes (1991), supra note 35.

38 See sources cited supra note 35.

39 GATT, supra note 22, Art. XIX:2–3.

40 The jurisprudential confusion engendered by these issues is address in Sykes, Alan O., The Safeguards Mess: A Critique of WTO Jurisprudence, 2 World Trade Rev. 261 (2003)CrossRefGoogle Scholar, reprinted in The WTO, Safeguards, and Temporary Protection from Imports (Chad P. Bown ed., 2006).

41 WTO Safeguards Agreement, supra note 33, Art. 8.3.

42 Id., Art. 7.

43 Bagwell, Kyle & Staiger, Robert W., Enforcement, Private Political Pressure and the GATT/WTO Escape Clause, 34 J. Legal Stud. 471 (2005)CrossRefGoogle Scholar.

44 Supra note 22.

45 See Appellate Body Report, India—Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R (adopted Sept. 22, 1999).

46 “In cases of necessity men have a right of using that which has already become the property of others. To sanction this indulgence, the necessity must be such that it cannot otherwise be avoided.” Hugo Grotius, On the Law of War and Peace [De Jure Belli ac Pacis], bk. II, ch. 2 (A. C. Campbell trans., 1814), available at http://www.bartleby.com/172/202.html.

47 Articles on Responsibility of States for Internationally Wrongful Acts, in Report of the International Law Commission on the Work of Its Fifty-Third Session, UN GAOR, 56th Sess., Supp. No. 10, at 26, UN Doc. A/56/10 (2001). The ILC commentaries on what were then the draft articles, UN Doc. A/56/10, at 59, include a thorough history of the ILC discussions. For the commentary relevant to our current discussion, see id. at 80–84 [hereinafter ILC Commentary].

48 See id. at 81 (discussion).

49 Fisheries Jurisdiction (Spain v. Can.), 1998 ICJ Rep. 432 (Dec. 4).

50 ILC Commentary, supra note 47, at 81.

51 The “Torrey Canyon,” Cmnd. 3246 (1967) (UK).

52 ILC Commentary, supra note 47, at 81.

53 A nice review of “financial necessity” arguments in cases involving sovereign debt defaults may be found in chapter 5 of Michael Waibel, Sovereign Defaults Before International Courts and Tribunals (2011).

54 See Roberto Ago (Special Rapporteur), Addendum to the Eighth Report on State Responsibility, [1980]2Y.B. Int’l L. Comm’n, pt. 1, at 13, 24, UN Doc. A/CN.4/318/ADD.5-7 (emphasis deleted) (“The internationally wrongful act of the State, source of international responsibility”).

55 Société Commerciale de Belgique (Belg. v. Greece), 1939 PCIJ (Ser. A/B) No. 78, at 160 (June 15).

56 As quoted in Report of the International Law Commission on the Work of Its Thirty-Second Session, UN GAOR, 35th Sess., Supp. No. 10, at 37, UN Doc. A/35/10 (1980).

57 See Addendum to the Eighth Report on State Responsibility, supra note 54, at 25.

58 Id. at 22–23.

59 Id. at 24.

60 A sunk investment is an investment that cannot be sold to recover its cost. If an investor drills an oil well, for example, it is impossible to “undrill” the well to recover the initial cost. Many capital investments have a significant sunk component.

61 Knight distinguishes risk, which is quantifiable, from uncertainty, which is not. Uncertainty is more difficult for markets to handle because by definition it is difficult to price. Frank Knight, Risk, Uncertainty, and Profit (1921).

62 Because investments are sunk, host countries have no reason to limit their policies to measures that generate joint efficiency gains.

63 This situation is a variant of the classic “lemons” problem. The seminal article is Akerlof, George, The Market for Lemons: Quality Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488 (1970)CrossRefGoogle Scholar.

64 See, e.g., Guzman, Andrew T., Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int’l L. 639 (1997)Google Scholar; van Akken, supra note 3. This conventional account of the rationale for investment treaties is subject to some dispute, however, based on various pieces of empirical evidence. They include some studies that find little impact of BITs on inbound foreign direct investment and survey evidence suggesting that the signing of a BIT does not affect investor decisions or political risk insurance premiums. See generally Lauge Poulsen, The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence, 2010 Y.B. Int’l L. & Pol’y, and the articles collected in the Effect of Treaties on Foreign Direct Investment:Bilateral Investment Treaties, Double Taxation Treaties, and Foreign Investment Flows (Karl P. Sauvant & Lisa E. Sachs eds., 2009). A more recent survey of the empirical evidence, how ever, observes that “the majority of studies conclude that [international investment agreements] have a positive impacton[foreign direct investment].”United Nations Conference on Trade and Development, The Impact of International Investment Agreements on Foreign Direct Investment:An Over View of Empirical Studies 1998–2014 (2014), at http://investmentpolicyhub.unctad.org/Upload/Documents/unctad-web-diae-pcb-2014-Sep%2024.pdf.

65 See Sykes, Alan O., Public Versus Private Enforcement of International Economic Law: Standing and Remedy, 34 J. Legal Stud. 631 (2005)CrossRefGoogle Scholar.

66 See generally van Akken, supra note 3. It is also important to note that investment treaties are not the only way for investors to avoid risk; political risk insurance can serve as a partial substitute. Insurance does not eliminate risk, however, but simply transfers it to a less risk averse entity. An appropriate investment treaty may actually eliminate inefficient risk by discouraging opportunistic behavior toward sunk investments.

67 For example, sensible domestic regulatory measures that reduce the value of foreign investments might be deemed not to constitute measures “tantamount to expropriation.”See, e.g., Been, Vicki & Beauvais, Joel,The Global Fifth Amendment: NAFTA’s Investment Protections and the Misguided Quest for an International Regulatory Takings Doctrine, 78 N.Y.U. L. Rev. 30 (2003)Google Scholar.

68 See also the exceptions for health and conservation measures contained in Article (8)(3)(c) of the 2012 U.S. Model Bilateral Investment Treaty, at https://ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf.

69 Many investment treaties contain “umbrella clauses” that allow investors to pursue treaty-based claims for violations of host state obligations that arise in another context, such as by contract or domestic statute. See Salacuse, supra note 3, ch. 11.

70 IMF bailouts, of course, have the same property; they are of little value unless they are implicitly undertaken at below market rates.

71 It is something of a puzzle as to why GATT allows any discrimination in balance-of-payments measures.Article XIII requires that the producer of competing products be treated equally, but why allow a nation facing a currency crisis to restrict imports of footwear, say, but not imports of electronics? Perhaps the answer is that certain categories of products are more essential and that the burden of a currency crisis should fall on the imports of less essential products. But the WTO/GATT system has done little historically to implement such a principle, leaving it to importing nations to decide which categories of products to target.

72 See, e.g., Kenneth Arrow, Essays in the Theory of Risk Bearing (1970).

73 E.g., Been & Beauvais, supra note 67.

74 Eugenio Diaz-Bonilla, Argentina: The Myth of a Century of Decline, Economonitor (Feb. 27, 2014), at http://www.economonitor.com/blog/2014/02/argentina-the-myth-of-a-century-of-decline/.

75 See Graciela Kaminsky, Amine Mati & Nada Choueiri, Thirty Years of Currency Crises in Argentina: External Shocks or Domestic Fragility? (2009), at http://home.gwu.edu/graciela/HOME-PAGE/RESEARCH-WORK/WORKING-PAPERS/argentina.pdf.

76 See J. F. Hornbeck, Congressional Research Service Report for Congress: The Argentine Financial Crisis: A Chronology of Events (2003), at http://fpc.state.gov/documents/organization/8040.pdf.

77 See Alvarez, supra note 3, at 368–70.

78 See especially José Alvarez & Gustavo Topalian, supra note 3. As noted earlier, some of the Argentina cases are still pending.

79 E.g., LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, paras. 226–61(Oct. 3,2006); Continental Casualty Co. v. Argentine Republic, ICSID Case No. ARB/03/9, Award, para. 178 (Sept. 5, 2008).

80 National Grid P.L.C. v. Argentine Republic, Award, paras. 260–62 (UNCITRAL Arb. Trib. Nov. 3, 2008).

81 E.g., CMS Gas Transmission Co.v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, paras. 128–35 (Sept. 25, 2007).

82 Contrast the original decision on liability in Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, with the decision on annulment in the same case (paragraphs 198 –219).

83 E.g., LG&E Energy Corp., supra note 79, para. 256; Enron Creditors Recovery Corp. v. Argentine Republic, ICSID Case No. ARB/01/3, Decision on the Application for Annulment, paras. 355–405 (July 30, 2010).

84 See the discussion in Continental Casualty Co., supra note 79, paras. 196 –236 (importing WTO law into the interpretation of “necessary”).

85 Supra note 33.

86 See Shavell, supra note 12 (discussion of excessive reliance expenditure under expectation damages).

87 See Blume, Lawrence & Rubinfeld, Daniel L., Compensation for Takings: An Economic Analysis, 72 Cal. L. Rev. 569 (1984)CrossRefGoogle Scholar.

88 See Merrill, Thomas W., Incomplete Compensation for Takings, 11 N.Y.U. Envtl. L.J. 110 (2002)Google Scholar.

89 The potential lack of efficiency is the core of the concern about compensation requirements in Levinson, Daryl, Making Government Pay: Markets, Politics, and the Allocation of Constitutional Costs, 67 U. Chi. L. Rev. 345 (2000)CrossRefGoogle Scholar. See also Been & Beauvais, supra note 67.

90 See the discussion of municipal liability for constitutional torts in Larry Kramer & Alan O. Sykes, Municipal Liability Under §1983: A Legal and Economic Analysis, 1987 Sup. Ct. Rev. 249.

91 See Kyle Bagwell & Robert W. Staiger, The Economics of the World Trading System (2002).

92 See Eric A. Posner & Alan O. Sykes, Economic Foundations of International Law, ch. 1 (2013).